Tandem Diabetes’s optimistic management guidance in its Q4 earnings release trigger a stock rally but will it continue?
Diabetes incidence is increasingly becoming a global medical catastrophe and is now among the leading causes of death due to related complex diseases. Studies show that more than half a billion of the worldwide population is currently dealing with diabetes.
The increasing prevalence of the disease is opening new avenues for companies like Tandem Diabetes Care, Inc. (NASDAQ:TNDM).
The diabetes management industry is seeing solid demand and is positioned to register an 8.9% CAGR until 2030. More specifically, Tandem deals in the insulin pumps and continuous glucose monitors market, which is expected to see a rise of over 6% on a compounded annual basis until 2033.
However, Tandem stock has disappointed investors over the past year by losing almost 20% of its value. Nonetheless, the stock has been gaining some strength lately, supported by its upbeat guidance.
Shareholders seem to have found their lost confidence as evident by the stock gaining 13.4% over the past month, easily eclipsing the broader market.
The stock has rallied by almost 50% since the company posted its Q4 2023 earnings report on February 21, 2024. However, it still trades at a discount at 2.61x forward sales, nearly 30% lower than its sector average and about 70% lower than its own 5-year average price-to-sales.
Does its valuation suggest a buying opportunity?
Tandem Diabetes Gross Margins Offset By Losses
Tandem Diabetes faced losses for many years. By the end of 2023, its total deficit was reported at $951.8 million.
But the company’s cost-volume mix for insulin pumps has delivered a positive gross margin since 2013. Tandem’s gross profit has been between $300-$400 million in the past couple of years.
Even with decent gross profits, the company’s bottom line remained in the red. Net losses from operations were $222.61 million and $94.59 million for 2023 and 2022, respectively.
Management is making a concerted effort to improve the firm’s product development processes and earn regulatory approvals for commercialization in order to further boost gross margin. But the company is heavily dependent on insulin pump products for its top line growth.
Global Reach Bodes Well
While the U.S. is a top business region for Tandem, it also generated revenues from other 25 countries, which contributed about 26% last year.
Nonetheless, non-GAAP sales of $772.82 million were reported by management for the year, reflecting a 4% decline from the level seen a year ago.
Pump shipments went fell to 104,000 from 128,000 in 2022. Worldwide pump shipments were over 450,000, representing a 7% increase in installed customers versus the year prior.
The company faced many challenges, but its installed base grew steadily which was undoubtedly a positive sign. Unfortunately, though, profitability still seems far away.
As for the guidance for the year, Tandem projected $850 million in non-GAAP sales, returning to growth of 10%, which is largely attributed to recurring revenue sources.
Non-GAAP gross margin is projected to be about 51% and management expects adjusted EBITDA to break even as shipments are expected to gain traction in the later half of the year due to seasonality.
Product Innovation to Drive Growth
While t:slim X2 has been the company’s top solution, the company has launched other offerings, including the Tandem Mobi insulin pump, deemed to be “the world’s smallest durable automated insulin delivery (AID) system” by the company. It was commercialized in February 2024.
Users are expected to experience enhanced service of the Control-IQ technology, which was instrumental in establishing Tandem’s greater market standing.
Not only is the company innovating but it is also enhancing existing products. Tandem’s t:slim X2 integrated with FreeStyle Libre 2 Plus Sensor from Abbott Laboratories (NYSE:ABT) supports users through automated glucose readings to help control blood sugar levels.
The company has consistently demonstrated a bent towards innovation, ranging across slim, Mobi, and Sigi, the pump platforms. There are quite a few ongoing clinical studies that are expected to receive further prominence this year. Moreover, it focuses on advancing its algorithm to include people with type 2 diabetes.
The adoption of insulin pumps is no doubt increasing, and management expects to expand at a rate that eclipses the past couple of years.
The company has set a target to grow its installed base to 1 million in the coming years and is also working to achieve a long-term gross margin goal of 65%.
Is Tandem Diabetes Stock a Buy Now?
With 7 analysts favoring a Hold versus 5 recommending a Buy, the consensus sentiment is that Tandem Diabetes is a moderate Buy.
Tandem has rolled out new products that should draw more customers. This could result in a higher user base and increased revenues but ongoing losses mean caution is needed.
As its bottom line is negative, investors ought to focus on its top line performance that hasn’t been notable over the last year.
Tandem’s outlook boosted investor confidence, but the company faces broad uncertainties, including increased competition that may curb an improvement in the financial statements.
Though lately surging, it may not be a sign of continued momentum. The analyst community doesn’t look pessimistic about the stock’s prospects. While the price they expect the stock to reach suggests a modest 2.9% upside, none of the 12 covering analysts suggest selling it.
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